Common tax traps to avoid

As a tax advisor I’m often asked by people at social events what the most common errors are that I see in the course of my work.

This is not an easy question to answer because taxpayers come in all shapes and sizes, the rules are many, varied and occasionally complex, and some scenarios simply have to be seen to be believed.

Notwithstanding that, however, if we focus on SME and individual taxpayers, and if we think of them in the context of Inland Revenue’s current compliance focus and the types of perennial risks tax auditors are very good at spotting, here’s a quick grab bag of issues which immediately spring to mind:

Property transactions: the new two-year disposal rule and a doubling in Property Compliance Project funding over the next five years means the ranks of IRD auditors are set to swell. This sector is now in the full glare of a very bright compliance spotlight. Combine that with IRD’s extensive information-gathering powers and sophisticated analytical techniques and it quickly becomes obvious how critical it is to get the tax treatment of land transactions right first time. Mistakes are costly (the PCP currently returns roughly $6 in additional tax for every $1 expended) so the golden rule continues to be get good advice as early as possible. Bottom line – only a fool would assume that all of the increased attention will be directed at Auckland and Christchurch.

Hidden economy: basically cash transactions and suppressed income. The heat will continue to go on the hospitality sector while a big (and very visible) push has just started on tradies. Don’t wait for the IRD to come knocking on this one. Their default assumption if they find any mischief is likely to be tax evasion. That means potential criminal charges and serious consequential outcomes.

International: for present purposes that means immigrants and Kiwis returning home after extended periods overseas. Lots to think about here including tax holidays for transitional residents, the correct tax treatment of all worldwide income, potential application of Double Tax Agreements, special rules for foreign currency loans and bank accounts, other special rules for overseas investments and interests in foreign superannuation schemes, and what IRD may want to know if you use foreign credit cards to pay for goods and services here in NZ.

Trusts: after a long period of serious analysis about where trusts fit in the NZ tax landscape, there are signs this has become an area of targeted enquiries by IRD. Although they remain tight-lipped over this particular stream of work, obvious areas of interest to IRD auditors include the accumulation and use of tax losses and “Penny-Hooper” issues arising from the diversion of personal services income.

GST and zero-rating for land: while the CZR rules are complex around the margins, frankly I’m amazed how often people get this wrong. This sets them up for preventable problems that are time consuming and costly to resolve. Seek advice on your position before any contract to buy or sell land goes unconditional.

GST and “lifestyle” choices: main warning signs here are low or no annual income, irregular sales and perpetual refunds. List of usual suspects here is headed by registered owners of small rural landholdings, homestays, charter boat operators and other interests that look more like private recreational pursuits than genuine taxable activities. Beware also the obligations you have to pay GST on any assets that are retained on deregistration.

Other GST issues: these tend to be more technical and less well known to the average punter. They include special time and value of supply rules for transactions between associated persons, deferred settlement rules and annual adjustments to correctly account for any non-taxable use of business assets.

Please note that this column is general in its nature and there will always be exceptions to any rule expressed or inferred above. Tax is all about detail and it is very rare for any two situations to be precisely the same. If you are in any doubt please discuss your concerns with your advisor.